Markets Pricing In A Viral All Clear

Financial markets disconnection with the real world accelerated overnight, with both equities and energy markets recording substantial gains as coronavirus lockdowns are eased across the globe. Life as we knew it, will not return to anything like normal anytime soon, even sans lockdowns, but facing down herd-like FOMO momentum usually leaves one trampled on the ground. Joining in or stepping aside seems to be safer strategies these days than “deep value investing.”

 

To be fair, some heavyweight names are saying the worst is over. Morgan Stanley and Goldman Sachs both said as much overnight. The Federal Reserve Vice-Chairman Richard Clarida counterposed that though, by saying that the US economy will need government support for some time yet. The welcome stating of the obvious poured a dose of reality on frothy equity markets, although they still finished comfortably in the green. The US government itself could still be a problem on this front. With further fiscal packages seemingly being dragged into a partisan mire. How quickly have we forgotten the increased China tensions? Nary a mention today of a trade war story that filled the headlines in the business press yesterday. Such is the desperation for a return to even partial normalcy for the world, and I can’t argue with that.

 

Someone who is arguing is the German Constitutional Court. Overnight it ruled that parts of the ECB quantitative easing programmes were illegal under German Law. It has overridden an EU Court of Justice ruling previously that they were legal, banned the Bundesbank from participating in any more bond-buying programmes for now, and given the ECB three months to sort the mess out. The ruling sent Euro lower versus the Dollar and rightly so. EUR/USD fell 0.65% to 1.0840.

 

The more profound question though is who is in charge in Europe? The German Courts of the European ones? The former opens up a continent-sized can of worms. Readers will know how underwhelmed I am with the European project in the absence of a monetary and fiscal union. And as a result, its recovery prospects, both since the GFC and now COVID-19. This adds another huge black mark to the debacle.

 

Both China and South Korea return from holiday today, although Japan remains on vacation until tomorrow. Both markets will have some bullish catchup to complete, and Asia, as a whole, should trade positively as the coronavirus reopening trade continues to gain momentum.

 

The data calendar is light in Asia today, with both Singapore and Hong Kong’s PMI today lower, but not surprisingly so. German Factory Orders this afternoon ae expected to drop by 10% with Europe-wide Retail Sales data likely to make grim reading. US ADP Employment data for March is forecast to drop by 20 million jobs. However, the street appears to have built up some herd immunity to bad news in recent days, accepting its inevitability but preferring to concentrate on the potentially better days ahead. Who I am to argue with this? The nightmarish US Initial Claims and Non-Farm Payroll data due this week, Trump trade wars, or the German Constitutional Court trying to seize control of Europe, may not be received as negatively as they usually should and would be.

 

Positive Wall Street session greenlights equity gains in Asia.

 

Wall Street continues embracing the peak virus trade overnight, with only the Fed’s Clarida dampening an otherwise frothy session late in the day. Equity markets were in no mood to listen to a Fed governor being the voice of reason though. The S&P 500 climbing 0.90%, the Nasdaq rising 1.10% and the Dow Jones rising 0.60%.

 

Asia looks set to continue in the same vein with markets concentrating on the winding down of coronavirus lockdowns and a resurgence in economic activity to follow. One exception is likely to be Chinese Mainland markets that return from Labour Day holidays today. The trade rhetoric and virus coverup accusations from Washington DC will weigh on sentiment this morning.

 

South Korea has returned from holiday and has surged higher by 1.10%. Singapore has risen 0.35% although Australia has retreated by 0.70% this morning. Still, a rebound in retail sales by 8.50% just released, should limit losses. The rest of Asia though, as it comes online set to emulate Wall Street and head higher over the morning.

 

US Dollar strength lingers.

 

The US Dollar continues to outperform as forex markets diverge somewhat from equity and energy markets. The EUR/USD falling 70 points to 1.0840 lifted the dollar index, which climbed 0.30% to 99.27. USD/JPY has also fallen from 107.00 to 106.35 this morning, its lowest level in one month. The persistent buying of haven currency US Dollars and Japanese Yen this week, suggests that currency markets are not yet wholeheartedly embracing the peak virus story.

 

FX traders are also likely to be more nervous about renewed US-China trade hostilities, especially with China only returning to work today. Worries that China may tolerate a weaker Yuan to punish the US is likely holding up a more wholesale rotation out of haven positioning.

 

Oil continues its breath-taking rally.

 

The perils of standing in front of short-term momentum are nowhere more apparent then oil markets at the moment, as the colossal rally continued overnight. Investors are piling into black gold as expectations that the peak drop in demand has occurred, as coronavirus lockdowns are unwound.

 

Brent crude surged 14.50% higher overnight to $31.50 a barrel and touched $32.00 a barrel this morning before easing slightly. Brent crude has resistance at these levels in the form of the 50-day moving average at $32.00 a barrel. Major resistance lies at $36.00 a barrel. Given that Brent has rallied from $20.00 a barrel only a week, $36.00 should prove an insurmountable challenge, even in this wildly optimistic environment.

 

WTI’s overnight rally was even more impressive, albeit from a lower base. WTI futures leapt by 20.50% to $ 24.60 a barrel in overnight trading, although WTI is unchanged this morning. WTI’s next meaningful resistance lies at $29.00 a barrel although, like Brent, that may be a bridge too far.

 

The return of China from holiday is capping gains in oil as energy markets reluctantly face up to the reality of deteriorating relations between China and the US. While the rest of the world despairs of the biggest kids in the playground ever being able to share the toys, worries that China could retaliate against the US virus and trade accusations are real. If anything can undermine a peak virus rally, a US-China trade war would do the job nicely.

 

Nothing has changed for gold traders.

 

Gold continues to experience impressive $30 ranges intra-day, with equally unimpressive almost unchanged close concluding the day. Such was the case overnight, with gold trading between $1680.00 and $1710.00 an ounce, only to close unchanged from the previous day at $1700.00 an ounce.

 

The price action suggests that gold remains the domain of intra-day momentum traders and not longer-term fundamental ones. The latter appears to be content residing on the side-lines until either $1650.00 or $1750.00 an ounce, are convincingly broken.

 

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Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific, from 2016 to August 2022
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley was OANDA’s Senior Market Analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV and Channel News Asia as well as in leading print publications such as The New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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